What are the most popular methods of procurement?
In public construction projects, for a long time the most popular form of procurement was the so-called “openbare aanbesteding” / “adjudication publique”, meaning an open public tendering on the basis of the lowest price as sole determining criterion. However, given the fact that such tendering procedures do not allow the contracting authority to take into account quality elements, over the last years, and also under the influence of the EU, contracting authorities tend to award contracts based on the most economically advantageous tender based on criteria of price and quality.
Construction projects in Oman may be procured as build-only contracts (Employer design), design and build or Engineer Procure and Construct (“EPC”) contracts. The EPC model is prevalent in the water, power and oil and gas sectors. Split onshore/offshore structures are frequently used in the market for international contracts for both tax and construction efficiency. Public private partnership (PPP) models are also used to procure long-term infrastructure and power projects.
Most of the larger construction projects in Denmark, public as well as private, are put out to tender for competitive bidding.
Public authorities and other public sector employers are obligated to comply with the public procurement legislation if the monetary value of a project exceeds a certain amount.
In addition to turnkey contracts, general contracts and individual trade contracts, public private partnerships (PPP) where the private company continues to manage the project after hand-over of the work are not unusual for public projects such as office buildings and court houses.
The most popular methods of procurement are two:
- By means of private contracts; or
- By public competition (when the promoter is Public Administration).
What is regulated pursuant to Article 42 of Construction Law is the selection of the service provider which uses the source of financing from APBN which is conducted through the following method:
- tender or selection which may be conducted through (i) pre-qualification, post-qualification, or fast tender;
- electronic procurement as mentioned in the catalog;
- direct appointment which may be conducted under the following conditions:
(a) emergency action for public security and safety;
(b) complex work which can only be conducted by a very limited number of service providers or may only be conducted by the rights holder;
(c) confidential work related to state safety and security;
(d) small scale work; and/or
(e) certain conditions.
- direct procurement which is conducted for the package with a certain value.
The Construction Law does not regulate the provisions on the method of procurement for the private sector. The only requirement is that the selection process may only be participated by a service provider who has fulfilled the requirements under the Construction Law.
It is often the case that a service user in the private sector selects the service provider by using a binding tender (where the service user and the winning bidder must conclude the contract) or non-binding tender (request for proposals).
It is not possible to specify what is the most popular method as this will depend on the specific requirement, specification and priorities of the project owner.
In the case of government contracts, the Mexican Constitution and the Public Works law establishes that public bid shall be the preferred procurement method. Other procurement methods included in the law are: Invitation to at least three participants (Restricted Bid), and Direct Award.
On the public sector, Colombia’s law has a prescription specifically for public procedures to select contractors, and, in some cases, public contests for PPP contracts. On the private sector, the biggest projects are developed through private processes where preselected companies negotiate the final contractual terms.
The most popular methods of procurement are the architect agreement and the general or total contractor agreement.
All the standard international procurement models are commonly used in Australia (i.e. construct only, Design and Construct, Construction Management, EPC, EPCM). Early Contractor Involvement procurement models are increasingly used.
The Procurement Act of 2016 and corresponding regulations apply to public employers. It is distinguished between procurements with an estimated value above or below the EEA threshold (2018: 51 million NOK in construction contracts and 1.3 million NOK for goods and services contracts, including consultant contracts).
For procurements with an estimated value below the EEA threshold the employer may use open or restricted procedures. The employer may choose to negotiate or to award the contract without any negotiations. Both procedures are equally popular.
For procurements with an estimated value above the EEA threshold the most popular procedure is open or restricted procedure without negotiations. Negotiations are allowed, provide that certain criteria are met.
Procurements with an estimated value below 1.3 million NOK do not require any special procedure, except that they must be accordance with certain basic principles of tender procedures, e.g. equal treatment, transparency and competition. Contracts with an estimated value below 0,1 million NOK are exempted from the procurement regulations.
In the last years, several public entities have been applying the Best Value Procurement method (BVP). In short, this method implies that the public entity looks at factors other than price, such as quality and expertise, when awarding the contract. The BVP-method is typically use in combination with a restricted procedure without negotiations.
Sweden has a long tradition of competitive bidding in the construction industry, including private as well as public works. Public procurement is regulated by legislation (see more below).
Build-only type of contracts (i.e. contracts with owner/employer design) is the most common contract form, although design-build contracts are becoming increasingly popular. Sweden’s largest procurer of construction works, the Swedish Transport Administration, has announced a plan to increase its use of design-build contracts from around 10% to 40%, suggesting that the design-build method of project delivery will give the contractors more freedom and incentives to develop innovative and efficient solutions.
The three main procurement methods in Hong Kong, in very broad terms, are:-
(a) Traditional general contracting
(b) Design and build
(c) Management contracting
The most popular form of procurement, and most construction work is currently carried out under, the system of traditional general contracting. This is where design is a separate function from construction – design and construction proceed sequentially, with construction commencing only after the design is complete or substantially completed.
Hong Kong is still at a relatively early stage in its adoption of Public Private Partnerships (PPP). Popular forms of PPPs include Build-Operate-Transfer (BOT), Build-Own-Operate, Buy-Build-Operate, Design-Build-Finance-Operate (also known as the Private Finance Initiative (PFI)) and Design-Build-Operate.
The three most common methods of procurement are the traditional method, design and build, and construction management.
Under the traditional method, the employer engages a design team to design the project, and then the project is put out to tender. The main contractor enters into a contract with the employer to complete the project, following the instructions of the employer’s design team which acts as an agent of the employer.
Design and build is an increasingly popular procurement method because it offers the employer single point responsibility . The employer engages a consultant to produce an outline design, which is then put out to tender. The design and build contractor who successfully bids for the works engages its own designers (or more commonly novates the original designers) to complete the design and then builds the project.
Less common, and only for use by sophisticated employers, is the construction management method whereby the employer enters into (i) a contract with a construction manager and (ii) a large number of contracts directly with the various trade contractors. The employer must take the risk of trade contractor default or insolvency and manage the interface between the trade contractors.
The most common type of project delivery method in the United States is design-bid-build. Under this method, the owner first retains an architect to prepare design drawings and specifications, after which the owner puts those documents out for review and bidding by contractors. Contractors who place bids agree to construct the project in accordance with the design prepared by the architect. The lowest, most responsive bidder is generally selected by the owner. Both the architect and contractor have separate contracts with the owner, who exerts control over the design.
Another popular project delivery method is known as design-build. Under this method, the owner generates the concept and the programmatic requirements, and then contracts with a single entity (known as the “design-builder”) to perform both the design and construction of the project. The owner benefits from the design-build method because it provides a single point of contact, minimizes risk for the owner, and expedites the design and construction phases of the project, which reduces the delivery schedule by overlapping those two phases. The contractor on the other hand takes on additional risk by contracting for both design and construction; however, such risk can be mitigated through contractual indemnity and insurance.
There are several other forms of project delivery which are lesser used, but nonetheless have important applications:
- The design-build-operate-maintain method combines the design and construction responsibilities of design-build procurements with operations and maintenance. Generally used in heavy construction projects, the design builder is also required to operate and maintain the project upon completion, and is compensated with a portion of operating revenues subsequently generated.
- The design-build-operate-transfer is the same as the design-build-operate-maintain, with the additional requirement that the design-build contractor is responsible for obtaining project financing. The design-builder is then paid from project proceeds upon completion, and once fully compensated, turns the project over to the owner.
- The Construction Manager at Risk method involves both preconstruction and construction phases. The owner retains the architect to prepare design drawings and specifications. The owner also retains a construction manager to consult with the architect and manage the construction. As the architect is developing the design, the construction manager is reviewing it and putting out to bid those portions of the design that are complete. The construction manager enters into contracts with subcontractors. This method allows construction to begin before the design is complete.
- The Construction Manger Not at Risk method is nearly identical to the “at risk” method. The one key exception is that the owner, not the construction manager, enters into contracts with the trade subcontractors to construct the project.
Only when the application of the Law on Public Procurement is mandatory, in such cases the methods envisaged by the same law are to be used. The same consist of the following Public procurement methods/procedures:
- Open procedure;
- Restrictive procedure;
- Qualifying procedure;
- Negotiating procedure with publishing an invitation to place bids;
- Negotiating procedure without publishing an invitation to place bids;
- Competitive dialogue;
- Design contest;
- Low-value public procurement procedure.
The traditional procurement method is by far the most commonly used in the UAE. Under this method, the Employer will instruct a professional team to carry out the design and provide the technical specification for the project. A separate tendering process is usually then run to appoint a Contractor. The Contractor is responsible for constructing the works to the specification provided.
There are a number of other procurement methods available and used in the UAE. Of these, the most frequently used are:
- “design and build” - where the Contractor takes on the design responsibility for the project (i.e. FIDIC Yellow Book); and
- “EPC” or “turnkey” - where the Contractor is responsible for engineering, procuring and constructing the project. This method requires minimal Employer input beyond setting the performance parameters for the finished project. The Contractor is then responsible for handing over the project such that it is ready-for-use at the required performance level from the date of completion (i.e. FIDIC Silver Book). The Silver Book is most commonly used for power projects – where the functionality of the project is critical to the success of the project.
In Germany procurement processes are governed by many different laws. To name just the most important ones: German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen - GWB), German Regulation on the Award of Public Contracts (Vergabeverordnung - VgV), Sector Ordinance (Sektorenverordnung – SektVO), Procurement Regulation for Contracts related to Issues of Defense and Security (Vergabeverordnung für die Bereiche Verteidigung und Sicherheit (VSVgV), Standard Building Contract Terms Part A (Vergabe- und Vertragsordnung für Bauleistungen, VOB/A).
The Contracting authorities must apply these rules if they wish to award construction works. As a rule, a public invitation to tender must be carried out.
Private clients can also use the tendering method to select the contracting party.
Where private clients are involved, there are no standardised methods of procurement. On public contracting, the most frequent methods of procurement are public procurement proceedings, negotiated proceedings with prior publication and non-public proceedings without prior publication.
Procurement for public contract is strictly regulated. The applicable rules will depend on the public legal entity involved in the project and on the contemplated cots of the contract. For large project, an open tender has to be carried out at the national or European level.
In relation to private contracts, the project owner is free to choose the applicable method of procurement. Competitive tender process is commonly used, but it is often opened only to a limited number of pre-selected bidders.
As far as the private projects are concerned, the parties are free to select their preferred contractor, either by directly engaging a party or by launching a call for tenders, and freely negotiate the contractual terms (please refer to the concept of the freedom to contract described under Question 8 below).
Unlike in private projects, public contracts are assigned through specific procurement methods. That said, the most frequently used procedures for the awarding of public contracts (works, supply of goods or services) are the open procedure (Art. 27 and 264 of Public Procurement Law) and the restricted procedure (Art. 28 and 265 of Public Procurement Law). Other, less common, procurement procedures are: (a) the competitive procedure with negotiation (Art. 29 of Public Procurement Law); (b) the negotiated procedure without prior publication (Art. 32 and 269 of Public Procurement Law); (c) the competitive dialogue (Art. 30 and 267 of Public Procurement Law); (d) the innovation partnership (Art. 31 and 268 of Public Procurement Law); (e) the direct award to a single economic entity as regards contracts of a value up to EUR 20,000 (Art. 118 and 327 of Public Procurement Law); (f) a brief informal tendering procedure for contracts of a value between EUR 20,001 and 60,000 (Art. 117 and 327 of the Public Procurement Law).
Public tenders are mandatory for government contracts. State-owned corporations either opt for public bidding or tenders by invitation.
The two main types of procurement methods commonly used in Malaysia are the traditional method (construct only) and package deal.
We have covered the traditional method in question 6 above. The main contractor is engaged only for the construction phase and the owner is fully liable for the design of the project. This, for a long time, was the preferred option for the bulk of government contracts and private sector projects.
Large-scale complex projects are often tendered on a package deal basis under which the main contractor assumes liability for both the design and the construction of the project. This includes design and build, turnkey contracts, and EPC Contracts. The main attraction of this procurement procedure is a single point of responsibility.
In addition, Malaysia has experienced significant success in employing the Project Delivery Partner (PDP) structure (similar for example to Crossrail in London) in the construction of the Klang Valley Mass Rapid Transit. The PDP plays a similar role to a project manager but with the added responsibility of having to deliver the project within an agreed time period and cost. This allows for the shift in risks from the project owner, to the PDP.